When you want to assess your business' liquidity, two numbers should come into play: your working capital and your current ratio. They're both built from the same components (current assets and current liabilities) but offer different kinds of insight into the same question. One gives you a real-money cushion, while the other tells you how comfortably your assets cover your obligations. Understanding how these two metrics behave and how to use them can help you make better informed financial decisions in the short term.

Below is a closer look at how these metrics work, when to use them and what they reveal about the health of your business.

What's in this article?

• What's the difference between working capital and current ratio?
  
• How do you calculate working capital and current ratio?
  
• When should you use working capital vs current ratio?
  
• What are the pros and cons of using working capital vs current ratio?
  
• How do working capital and current ratio relate to current assets?
  

What's the difference between working capital and current ratio?

Both working capital and the current ratio measure how well a business can cover its short-term obligations. However, they tell the story in different formats.

Working capital is a monetary amount, calculated as current assets minus current liabilities. It tells you how much you have left over to cover short-term obligations after you pay your current bills.

The current ratio is a proportion, calculated as current assets divided by current liabilities. It tells you how many pounds of current assets you have for every pound of current debt.

Working capital gives you liquidity in hard numbers, while the current ratio offers a ratio you can use to compare across time, scale or companies. Assume your business has £500,000 in current assets and £300,000 in current liabilities. Your working capital is £200,000, which means you have £200,000 available to cover upcoming costs. Your current ratio is 1.67, which means you have £1.67 in assets for every £1.00 you owe.

How do you calculate working capital and current ratio?

Both of these financial metrics rely on the same two inputs (current assets and current liabilities), and neither distinguishes between types of current assets. While cash and accounts receivable are more liquid than inventory, they carry the same weight in these formulas. Here's how to calculate each one.

Working capital

• Working Capital = Current Assets - Current Liabilities
  

If a business has £120,000 in current assets and £100,000 in current liabilities, its working capital is £20,000. That means the business could pay its current bills and still have £20,000 left over to deploy or to serve as a cushion against unexpected needs. Context matters here: a working capital surplus of £20,000 might be plenty for a lean operation but risky for a larger company with more expenses.

Current ratio

• Current Ratio = Current Assets ÷ Current Liabilities
  

If a business has £120,000 in assets and £100,000 in liabilities, the current ratio is 1.20. In other words, the business has £1.20 in current assets for every £1.00 it owes.

A ratio above 1.00 means you can cover your liabilities. While it depends on the industry and business model, a ratio between 1.50 and 2.00 generally signals a healthy position. A ratio below 1.00 can be a red flag; your liabilities exceed your assets, which could signal cash flow problems in the future.

When used together, these two figures offer both zoomed-in and zoomed-out views of your liquidity. One shows the cushion in pounds, while the other conveys the coverage ratio.

When should you use working capital vs current ratio?

Both metrics measure liquidity, but they serve slightly different roles depending on what you're trying to understand or communicate. Here's when to use each one.

Use working capital for day-to-day decisions

Working capital tells you how much short-term leeway you have to work with. Use it to determine whether you:

• Can fund an inventory purchase without dipping into reserves

• Have enough cash on hand to cover an unexpected tax bill or pay suppliers early

• Can avoid short-term financing

Working capital answers those questions directly. If your team is managing short-term cash needs (and especially if your business has uneven payment cycles), this is the number to watch.

Use current ratio when you compare or report

The current ratio is more of a signal. It tells you how well positioned you are to meet upcoming obligations – not as concrete sums, but in proportion to what you owe. That makes it a better tool for:

• Communicating liquidity to lenders, investors or auditors

• Comparing your performance across time or with your peers

• Monitoring risk exposure from a high level

Because it's standardised, the current ratio adjusts for scale. A ratio of 1.50 means the same thing for a 5-person startup as it does for a company with hundreds of employees.

These are complementary metrics. In practice, you might track working capital weekly to manage cash flow and check your current ratio quarterly to ensure your financial outlook remains sound.

What are the pros and cons of using working capital vs current ratio?

Working capital and the current ratio give you different angles on the same story. Each is useful, but each is incomplete on its own. Here are the pros and cons of both.

Working capital

Pros

Working capital is straightforward and actionable. It gives you a clear number to plan around, and it helps with short-term operational decisions (e.g. "Can we cover payroll, order more inventory or invest in growth without raising outside capital?"). It's easy to model in cash flow forecasts or internal planning tools.

Cons

Working capital doesn't scale. While £100,000 in working capital might be more than enough for one business, it could be dangerously low for another. It also lumps all current assets together without accounting for liquidity. A positive figure doesn't necessarily mean you're flush with cash – that "excess" might be sitting in slow-moving inventory or stuck in late receivables.

Current ratio

Pros

The current ratio is standardised across businesses of different sizes so it's easier to compare over time or with that of peers. It's commonly used by lenders and investors as a quick test of short-term solvency, and it flags risk early.

Cons

The current ratio doesn't show how much leeway you actually have. As with working capital, it doesn't account for asset quality. Two companies could both show a ratio of 2.00, but one might be holding mostly cash, while the other is waiting on a pile of unpaid invoices. The ratio can also be misleading if you rely on it without assessing the composition of your current assets.

Both metrics matter and both require context. A strong current ratio doesn't guarantee you can meet payroll, and positive working capital doesn't mean your assets are liquid. To get a clear view of your short-term health, you need to look through both lenses.

How do working capital and current ratio relate to current assets?

Current assets are the resources you expect to convert into cash within a year. They include cash, accounts receivable, short-term investments and inventory. Working capital and the current ratio both use current assets to measure short-term financial health. Any movement in current assets – whether up or down – will impact both metrics. If current assets increase (while liabilities stay flat), working capital does too and the current ratio also improves. If current assets decrease, both metrics get weaker.

Working capital and the current ratio assume your current assets are liquid and accessible, but that's not always the case. Access to accounts receivable depends on how quickly your customers pay. Inventory might sit for weeks or months before it converts to cash, if it moves at all. As a result, you could have strong-looking metrics but still struggle with liquidity. Two companies might report identical working capital or current ratio figures. But if one is holding mostly cash and the other has a lot of unsold inventory, their ability to cover short-term obligations is vastly different.

When you compare these measures, ask yourself these questions:

• Are you collecting receivables quickly?

• Is your inventory turning over efficiently?

• Is your cash position improving or being stretched to cover gaps?

These dynamics all feed directly into these metrics. Strong liquidity is about access to cash, not just what's on the page. When receivables are piling up faster than payouts or you have an opportunity to invest in growth, flexible financing through Stripe Capital can offer fast funds based on your payment volume and history on Stripe. Automated payments are a fixed percentage of your sales so repayment doesn't become another burden during a slow sales month.